My assumptions are a perpetual growth rate of 1.5% and a discount rate of 11.38%. This is 3% higher than the overall interest rate on Polaris debt of 8.38%.

Including the non restricted cash of $23.88 million I get a fair value of $346.11 million or $21.88 per share. This represents upside potential of more than 100% from the current share price.

My sensitivity analysis show that my valuation is robust to a wide range of much higher discount rates. I therefore regard Polaris as a super safe and super cheap investment.

Now lets see how the valuation changes if we are assuming the building of a binary unit that goes into its first year of full production in 2019. Management stated that the binary unit will cost around $30 million and could be fully operational in 5 quarters.

The main differences to the other model are the extra capital expenditure in 2017 and 2018 of cumulative $30 million and the increase of annual revenue of $8m million in 2019 due to the binary unit.

My general assumptions about the discount rate and the perpetual growth rate remain the same.

This gives me a value of $369.30 million or $23.34 per share. The upside potential is therefore higher than in the first case (114%) and the project is value additive.

The sensitivity analysis offers the same conclusion like before: an investment in the company is super cheap and super safe.

All in all my fair value estimate does not differ materially from Peter Kaye's results even though we did not collaborate.

Earnings Call

In this section I will summarize the main points made by management on the last earnings call.

The Jacinto project is earnings positive at an average net production of 55 megawatts. The difference between net and gross production represents 5.5 megawatts and does not change with scale.

In Q1 2017 there will be turbine maintenance work. Therefore first quarter earnings will not be earnings positive.

Management expects to get to a gross production of 69 megawatts by stabilizing steam flows (this takes 3 to 6 months) and adding an injection system.

The binary unit will cost $30 million and will be in production in the last quarter of 2018. The unit will add 8 to 10 megawatts net. Production could start in Q2 2017.

If everything goes according to plan Polaris could have an EBITDA of $60 million in 2018. Note: this is higher than I assume in my DCF.

Management thinks about a refinancing. It would be easier to do one in 2019 without a special credit facility for the binary unit. The refinancing terms get better as the project moves forward.

Polaris's other project, the Casita project, is also moving forward. Management is in discussion with the German equivalent of the World Bank for a $25 million loan. The ultimate scale of the project is estimated to be between $25 to $40 million.

On M&A: the company looks at 10 to 15 different companies. Some have assets in the same jurisdictions as Polaris.

Conclusion

In my mind Polaris is still a great investment opportunity.

Disclosure:I am/we are long RAMPF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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